Use the following information for questions 82 and 83.
Hull Co. leased equipment to Riggs Company on May 1, 2015. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2016. Riggs could have bought the equipment from Hull for $4,800,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2012, of $4,200,000. Hull's depreciation on the equipment in 2015 was $540,000. During 2015, Riggs paid $1,080,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $96,000 in 2015. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.
-Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2015, should be
A) $444,000.
B) $540,000.
C) $984,000.
D) $1,080,000.

Question

Quizplus · Accepted Answer

The total minimum lease payments for the year would be $1,800,000 ($1,080,000 already paid plus $720,000 for the remaining 4 months). Since the collectibility of the minimum lease payments was not reasonably predictable at the inception of the lease, Riggs must recognize rent expense of $1,080,000 (the payments made during 2015) over the lease term. Therefore, the expense incurred by Riggs for the year ended December 31, 2015, is $1,080,000.

Use the Following Information for Questions 82 and 83